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6 Financial Mistakes Millennials Should Try To Avoid

High schools, trade schools and colleges can provide valuable knowledge and job skills, but in most cases, these educational institutions do little to teach students about how to manage their personal finances. Some people are lucky enough to have had financial guidance throughout their lives, whether from parents or mentors; for most young people, however, the transition from relying on the help of others to managing on their own can be difficult.

Below are six of the most common financial mistakes people tend to make in their young adulthood. Avoiding these mistakes can go a long way toward leading you to a financially secure future.

Mistake 1: Not Setting Money Aside for a Rainy Day

Conventional wisdom states that you should have three to six months of living expenses set aside in a savings account. This may seem like an unrealistic goal, particularly if you are living paycheck to paycheck, but it is not impossible. Just don’t expect to do it overnight.

When I got my first apartment, my grandmother gave me some great advice. She said, “Include yourself as one of your monthly billers.” I wasn’t making much money at the time, so I started out small with just $20, but I treated it as yet another of my monthly expenses and deposited it in a savings account. Every time I got a raise, I increased that amount. After a few years, I had a sizable savings account.

The important thing is that you keep this set-aside money in a separate account and not touch it unless you absolutely have to. Try to pretend it’s not even there. Life has a way of throwing unexpected expenses your way, so having that money easily available is likely to come in handy someday. If you do use the money, be sure to work toward rebuilding your savings soon after.

Mistake 2: Failing to Create and Stick to a Budget

Budgets are extraordinarily important. Without them, it is very easy to find yourself strapped for cash or drowning in debt with no idea where your money went. When setting up a budget, you should start by listing all of your monthly expenses from rent and utilities to clothes and entertainment.

Next, divide your list into “needs” and “wants.” Sure, you may feel you need to go out with your friends once a week, but that is actually something you want. Your needs should include things such as rent, student loans, groceries and of course, your payment to yourself.

Determine how much money is required to pay the expenses in your “needs” column and subtract it from your total monthly take-home pay. What you have left is what you can afford to divide among your “wants.” If you only have $100 left after paying your necessary expenses and you use $80 to buy a new outfit, you will only be able to spend $20 on entertainment in that particular month. Exceeding your budget is the fastest way to get yourself into unmanageable debt.

Be sure to keep track of how much you are spending in each category of expenses. If you find this difficult to do, you may want to look into using free personal finance software. There are several options available, including Money Manager Ex, HomeBank and AceMoney Lite; or, if you prefer, you can use online programs such as Mint or Rudder. The important thing is to find a system that you find intuitive and then actually use it.

Mistake 3: Not Using Coupons and Apps to Save Money

Among the expenses in your budget, groceries can be one of the highest. According to the USDA, adults between the ages of 19 and 50 spend between $166 and $334 per person per month on groceries. That is a very large spending range, and you will want to try to keep your grocery spending on the lower end. While clipping coupons and checking for sales can be time-consuming, it is a great way to significantly reduce your grocery spending each month.

There are also a number of apps that can help you save money on food and other important expenses, such as cleaning supplies and grooming products. SavingStar is one example and it is my favorite, since instead of seeing the savings at the register, the money you save goes into an online account that you can transfer directly into your savings account. That’s cold, hard cash given to you just for using the app while buying products you would have bought anyway.

A number of other retailers offer ways to reward customers with savings, whether through apps, text-based coupons or loyalty cards. Be sure to take advantage of everything that is offered by the stores where you shop the most often. You may be surprised how much that can help you stretch your budget.

Mistake 4: Allowing Credit Card Debt to Build Up

There are a number of good reasons to use credit cards: they can help you build your credit rating, they can make it easy to review your monthly expenses, they provide a lot of convenience, and many give you cash back on your purchases.

However, unless you are careful with how you use them, credit cards can also be very dangerous.The interest rates on credit cards are extremely high, particularly if you have not yet established a good credit rating. Unless you pay your card off in full each month, this interest and your remaining debt can build up very quickly.

Do NOT pay only the minimum required monthly payment. Doing so can result in paying double—or more!—for everything you charge. When I got my first credit card, I was advised to pay a minimum of 25% of the total balance or $25, whichever was more, every month. That is a good minimum to stick by if you cannot afford to pay the full balance. Just be sure to avoid using the card again until you have caught up on your payments.

Your goal should be to pay off your credit card in full each and every month. If you find that you are unable to do this and the amount you owe each month increases continually, stop using the card immediately. If necessary, have someone you trust hold it for you and do not use it again until it is fully paid off. If you find that you do not have the self-discipline to keep debt from building up on your credit cards, you may want to cut them up, cancel them or just keep one around to be used only in the event of an emergency.

Mistake 5: Not Participating in Employer-Sponsored 401k or 403b Plans

If you work for a company that offers a retirement savings plan and you qualify to participate, you absolutely should. Even if you feel that you do not have any extra money to spare from your paycheck, failing to take advantage of this retirement savings plan while you are young can be one of the biggest financial mistakes of your life. There are a number of reasons:

Most employers will also contribute toward your retirement savings. If your company offers a 50% match for up to 6% of your salary, for example, then you should invest at least 6% of your pay in order to reap the most benefit from this match. This is free money that is yours for the taking and it can result in a huge increase in your total retirement package.

Unless you are contributing to a Roth account, the money you contribute to the plan is not taxable until you take it out. This means that while you may be contributing 6% of your pay, your paycheck will not decrease by a full 6%. You may also qualify for other tax benefits simply for contributing to a retirement fund.

Compound interest is most beneficial when you have money invested for a long period. Though retirement may be a distant thought to you now, starting your retirement fund at this stage in your life can result in a very nice nest egg when you are older. You will thank yourself one day.

Mistake 6: Not Carrying a Sufficient Amount of Insurance

When you are working within a limited budget, you may feel that expenses such as insurance are a waste of money and not worth the cost. In some cases, such as insurance plans for cell phones or appliances, this may be true. But when you run the risk of losing a significant amount of money or property, such as if there is a fire in your apartment complex or you are responsible for a serious car accident, having sufficient coverage can mean the difference between getting by and catastrophic financial loss.

Of course, nobody wants to pay for more coverage than they actually need. This is why it is to your benefit to contact a Tri County Agent to discuss your risks, assets and insurance coverage options. We can help you find affordable coverage that will keep you and your finances properly protected.